FTSE Futures

The FTSE 100 – or ‘Financial Times and Stock Exchange’ 100 index – is a stock market index that covers the top 100 companies listed on the London Stock Exchange, one of the world’s leading stock exchanges. This index began in 1984 and its components, weighted by size, constitute roughly 81% of the market capitalization for the entire exchange.

There are other FTSE indices, such as the FTSE 250 and FTSE 350, but FTSE futures are based on the FTSE 100 – thus representing the largest companies in the United Kingdom by market cap.

In this article, I’ll cover FTSE futures and discuss FTSE futures contracts, FTSE futures prices, contributing factors to value, and other necessary bits of information for investors who want to get into futures.

What are Stock Market Index Futures?

First, we’ll cover the difference between the FTSE and other stock market index futures and regular commodity futures, like those with oil, corn, natural gas, etc.

As you can imagine, there is no underlying physical commodity with FTSE futures. This is a good thing and a bad thing, depending on your perspective. For starters, trading the FTSE can be complicated because you’re trying to predict the value of one index featuring 100 separate companies. Throw in economic factors – including events that happen halfway across the world while you’re asleep – and you can see how this complicates matters.

But, there is a simplicity to trading indices like the FTSE. You don’t have to worry about severe weather, drought, or floods; you don’t have to deal with decreases in demand from consumers for, say, coffee or corn; you don’t have to worry about a pipeline breaking, or usual physical interruptions in supply. You are instead looking at the big picture: Is the British economy going to do well or not?

There is also a unique relationship between index futures and the indices that they track. The FTSE 100 influences the value of FTSE futures, but the opposite is also true – sometimes, the value of FTSE futures influences the later value of the FTSE.

For example, futures are traded before the market opens. If futures rise, then traders expect the market to rise also, and trade accordingly.

Historical Price Activity for FTSE Futures

As with the Dow Jones in America, the FTSE 100 is up considerably from its original levels. In 1984, when the index debuted, it sank to a low of 984 points; since then, it has rise to well above six times that value, with a current level of just over 5,800 (as of August, 2012). The index peaked in 1999 at 6,930 and has had some drops since then, especially after the global recession hit in 2008.

The FTSE futures price chart below gives you an idea of how the index has fared over the past five years:

As a whole, though, the market is up:

One thing traders should be aware of is how interconnected each major stock exchange is with the other exchanges. True, the FTSE is isolated from the Dow Jones or the Tokyo Stock Exchange, but what impacts one stock market impacts the others, generally. You can observe this if you watch the markets one by one as they open and close; a poor showing in an early market can cause investors in later markets to worry.

FTSE Contract Specs

Specifications for futures contracts are important because they let you know how much you are leveraging, what margin requirements you’ll have to meet, and other key info.

FTSE futures are traded electronically on the LIFFE CONNECT electronic trading platform used by the NYSE Euronext derivatives market. The FTSE futures symbol is Z, and the contract is valued at £10 per index point, moving in 0.5 increments. To gain the contract value, multiply £10 by the current index value. If it’s 5,000, then the contract is valued at £50,000.

Margin requirements are recalculated at the end of each trading day by an algorithm created by NYSE Euronext, but they typically hover around £3,000 for initial and maintenance. There currently aren’t any mini FTSE futures contracts available.

Conclusion

The FTSE offers a chance to take advantage of the U.K.’s major stock exchange and indirectly gain access to stocks that you normally wouldn’t trade if you are a non-British investor. Pay close attention to other major indices to get an idea of what the FTSE could do when trading opens each trading day. Also pay attention to the Bank of England’s Monetary Policy Committee; it controls monetary policy for the U.K. and almost always has an impact on FTSE and FTSE futures with each major announcement.